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Pressure Increases on Small Banks

Community banks are coming under intense pressure from a crumbling commercial real estate market, a weak economy - and lop-sided competition with banking goliaths deemed too big to fail, FDIC Chairman Sheila Bair said Monday.

As the Federal Deposit Insurance Corp. braces for the 100th bank failure this year - the most since 1992 - Bair warned that small community banks are struggling to compete against behemoths such as Citigroup and Bank of America. Reason: Last year's $700 billion bank bailout proved that the federal government is willing to spend whatever it takes to keep the biggest banks from going under.

" 'Too big to fail' has become worse," Bair told USA TODAY. "It's become explicit when it was implicit before. It creates competitive disparities between large and small institutions, because everybody knows small institutions can fail. So it's more expensive for them to raise capital and secure funding."

The left-leaning Center for Economic and Policy Research last month found that banks with more than $100 billion in assets paid 1.15% for funds, and all others paid 1.93% late last year and early this year. That amounted to an annual subsidy worth up to $34.1 billion for the 18 biggest bank companies.

"They compete against community banks all over the nation," says Camden Fine, president of the Independent Community Bankers of America. Community banks "didn't do anything wrong. They didn't cause this train wreck."

Another threat: Commercial real estate - small banks' bread and butter - is deteriorating because of the weak economy. "This is going to be a continued source of stress," Bair said.

She says things won't get as bad as they did when the savings-and-loan crisis claimed 1,373 banks from 1985 to 1992. There were 25 bank failures last year and have been 99 this year.

"One hundred will come shortly," Bair said. "These will continue at a good pace this year and next - but I don't think anywhere close to what we saw during the S&L days."

Joshua Siegel of private-equity firm StoneCastle Partners calculates that at least 1,200 small banks are "under extreme stress as measured by insufficient capital, poor liquidity, profitability and asset-quality problems."

Frederick Cannon, chief equity strategist at Keefe Bruyette&Woods, expects that bank failures might "exceed 500 banks and could go much higher."

He said regional banks are most vulnerable to losses in commercial real estate, which accounts for 32% of their loans vs. 10% for the biggest banks.

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